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Should We Eliminate All Energy Subsidies?

by Michael Levi
January 24, 2011

Writing in the Washington Post a couple weeks ago, Jeffrey Leonard argued that Congress should scrap all energy subsidies – and that clean energy would come out ahead. The op-ed was a shorter version of an essay in the current issue of the Washington Monthly. Here’s his bottom line:

“If President Obama wants to set us on a path to a sustainable energy future—and a green one, too—he should propose a very simple solution to the current mess: eliminate all energy subsidies….  It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated.”

I understand the political logical of this pitch: the current climate in Washington makes it easier to cut subsidies than to impose new regulations. But the odds that clean energy would win from eliminating all subsidies is roughly zero.

Here’s the heart of Leonard’s argument:

“One thing about [subsidies] is easy to summarize: they are heavily tilted toward fossil fuels. Government statistics show that about 70 percent of all federal energy subsidies goes toward oil, natural gas, and coal. Fifteen percent goes to ethanol, the only renewable source of energy that consistently gets bipartisan support in Congress (think farm lobby and Iowa). Large hydro-power companies—TVA, Bonneville Power, and others—soak up another 10 percent. That leaves the greenest renewables—wind, solar, and geothermal—to subsist on the crumbs that are left.”

There are two problems with this. First, the statistics are wrong. The Department of Energy reports that renewable energy gets far more subsidies than any other source. As of FY2007, renewables received 30% of federal subsidies. Coal, oil, and gas together received 33%.  (The rest went to end use, generic electricity, nuclear, and conservation.)

Second, fossil subsidies are spread across a much bigger base than subsidies for alternative fuels, since alternative fuels still make up a tiny fraction of U.S. primary energy. The same DOE report I just linked to showed that coal- and gas- fired electricity received average subsidies of 44 and 25 cents per megawatt hour, respectively. In contrast, wind and solar got subsidies of $23 and $24 per megawatt hour, respectively. Take those subsidies away, and you can guess which energy source wins. Even if Leonard’s statistics were correct, the much larger base for fossil fuels would still lead you to conclude that renewables wouldn’t benefit from eliminating all subsidies.

I’d love to find a quick fix for America’s energy problems just as much as the next guy. I’d also be delighted to have a reason to cut subsidies, many of which are hugely wasteful. But an effort to eliminate all energy subsidies without instituting better alternative policies should be understood for what it is: a recipe for cementing the dominance of traditional fossil fuels against their competitors.

Post a Comment 4 Comments

  • Posted by Taylor Wray

    Meh, I think you’re both right. Ending all subsidies would probably give a bit of a relative boost to fossil fuels, but in the long term (and maybe even the medium term) there is no chance that fossil fuels will continue to compete, or “cement their dominance.”

    Gas is already around $4-a-gallon now. John Hofmeister, a former Shell president, is predicting $5-a-gallon gas by next year, and the price will only continue to rise from there as developing nations ramp up their demand and peak oil sets in.

    If anything, I predict political pressure from oil and gas companies to INCREASE their subsidies over the long term as consumers opt for ever-better renewable technology in the face of rising fossil fuel prices. Sometime in the next decade, there will be a tipping point and fossil fuels will be playing defense from then on, regardless of what we do with subsidies today.

  • Posted by David Bergman

    You’ve probably researched the numbers much more than I have, but I’ve seen many articles (like this one that indicate fossil fuels are much more heavily subsidized than renewables.

    But your point may be looking at it in terms of $/amount of energy. The absolute subsidy numbers are higher, but maybe not the relative ones since we produce so much less renewable energy. But then isn’t that a bit of a Catch 22, serving to maintain the status quo: so long as the amounts of fossil fuel energy we use remain high, so should the amount of subsidy per unit?

    In other words, if the figures in that New Republic article are correct, that absolute dollar differential would go a very long way in both research and lowering the cost of renewables. (And then there’s the continuity issue: I suspect that most of the fossil fuel subsidies are long term, whereas funding for renewables programs tends to be for a year or two, which means businesses cannot make long term investment plans.

    [ML: The TNR piece is talking about global subsidies. Those are heavily skewed toward fossil fuels. I’m talking about US subsidies. They tilt toward alternatives.]

  • Posted by Steve Fahmie

    An endless debate, and incomplete when the negative externalities of burning fossil fuels are not monetized. Pollution, including the release of greenhouse gasses, is a subsidy without a budget line item, but is as real a cost to society as taxpayer financed cash grants. The biggest energy subsidy – benefiting oil interests – are the hundreds of billions of “national defense” dollars we spend annually protecting the oil franchises of oppressive, Middle East kleptocracies, while simultaneously hollowing out our economic vibrancy.

  • Posted by Mason Inman

    Many news articles have said that oil industry tax breaks are in the tens of billions, like this recent one from Bloomberg:
    “Oil Companies’ $21 Billion U.S. Tax Break Survives Repeal Effort in Senate”

    Those tax breaks do not seem to show up on EIA’s tally sheet. So I hope that Levi can answer two questions:

    1. Does he think this number of ~$20 billion is correct?
    2. Why don’t these tax breaks (whatever the actual amount) appear in the EIA tally?

    It seems that the disagreement between Levi and Leonard is largely over what counts as a subsidy. I wonder if there are other subsidies—whether for renewables or fossil fuels—that are missing from the tally sheets.

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